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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 0-17995
ZIXIT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-2216818
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
2711 NORTH HASKELL AVENUE
SUITE 2850, LB 36
DALLAS, TEXAS 75204-2911
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 515-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT APRIL 30, 2001
- -------------------------------------- ------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE 17,040,663
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INDEX
PART I-FINANCIAL INFORMATION
Page
Number
------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at March 31, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000 and for the
cumulative period from January 1, 1999 through March 31, 2001 4
Condensed Consolidated Statement of Stockholders' Equity and
Comprehensive Net Loss for the three months ended March 31, 2001 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 and for the
cumulative period from January 1, 1999 through March 31, 2001 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, 2001 December 31, 2000
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 34,541 $ 13,347
Marketable securities 8,698 36,943
Other current assets 1,751 1,942
------------ ------------
Total current assets 44,990 52,232
Investment in Maptuit Corporation, at cost 3,000 3,000
Property and equipment, net 17,231 19,400
Other noncurrent assets, net 3,689 4,045
------------ ------------
$ 68,910 $ 78,677
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,237 $ 2,431
Liabilities related to discontinued operations 1,111 1,116
Deferred revenues 35 --
------------ ------------
Total current liabilities 3,383 3,547
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, 10,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 175,000,000 shares 193 193
authorized; 19,332,563 issued, 17,040,663
outstanding in 2001 and 19,327,563 issued,
17,035,663 outstanding in 2000
Additional capital 180,529 180,128
Unearned stock-based compensation (11,037) (14,615)
Treasury stock, at cost (11,314) (11,314)
Accumulated other comprehensive loss (189) (169)
Accumulated deficit (net of deficit accumulated during
the development stage of $96,795 at March 31, 2001
and $83,233 at December 31, 2000) (92,655) (79,093)
------------ ------------
Total stockholders' equity 65,527 75,130
------------ ------------
$ 68,910 $ 78,677
============ ============
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Cumulative During
Three Months Development Stage
Ended March 31, (From January 1, 1999
------------------------------ Through
2001 2000 March 31, 2001)
------------ ------------ -----------------------
Revenues $ 104 $ 96 $ 597
Research and development expenses (2,205) (2,211) (34,414)
Operating costs and general corporate expenses (12,183) (9,595) (71,862)
Investment income, net 674 574 6,135
------------ ------------ ------------
Loss from continuing operations before income taxes (13,610) (11,136) (99,544)
Income tax benefit -- -- 807
------------ ------------ ------------
Loss from continuing operations (13,610) (11,136) (98,737)
Discontinued operations 48 -- 1,942
------------ ------------ ------------
Net loss $ (13,562) $ (11,136) $ (96,795)
============ ============ ============
Basic and diluted loss per common share:
Continuing operations $ (0.80) $ (0.72)
Discontinued operations -- --
------------ ------------
Net loss $ (0.80) $ (0.72)
============ ============
Weighted average shares outstanding 17,040 15,436
============ ============
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE NET LOSS
(In thousands, except share data)
(Unaudited)
Unearned
stock-
based
Common Stock Additional compen-
Shares Amount capital sation
---------- ---------- ---------- ----------
Balance, December 31, 2000 19,327,563 $ 193 $ 180,128 $ (14,615)
Exercise of stock options
for cash 5,000 -- 24 --
Unearned stock-
based compensation
for service providers -- -- 381 (381)
Amortization of
unearned stock-
based compensation -- -- -- 3,959
Other -- -- (4) --
Comprehensive net loss:
Net loss -- -- -- --
Unrealized loss on
marketable securities -- -- -- --
Comprehensive net loss -- -- -- --
---------- ---------- ---------- ----------
Balance, March 31, 2001 19,332,563 $ 193 $ 180,529 $ (11,037)
========== ========== ========== ==========
Accumulated
other Total
Treasury comprehensive Accumulated stockholders'
stock loss deficit equity
---------- ------------- ---------- ----------
Balance, December 31, 2000 $ (11,314) $ (169) $ (79,093) $ 75,130
Exercise of stock options
for cash -- -- -- 24
Unearned stock-
based compensation
for service providers -- -- -- --
Amortization of
unearned stock-
based compensation -- -- -- 3,959
Other -- -- -- (4)
Comprehensive net loss:
Net loss -- -- (13,562) (13,562)
Unrealized loss on
marketable securities -- (20) -- (20)
----------
Comprehensive net loss -- -- -- (13,582)
---------- ---------- ---------- ----------
Balance, March 31, 2001 $ (11,314) $ (189) $ (92,655) $ 65,527
========== ========== ========== ==========
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Cumulative During
Three Months Development Stage
Ended March 31 (From January 1, 1999
------------------------------ Through
2001 2000 March 31, 2001)
------------ ------------ --------------
Cash flows from operating activities:
Loss from continuing operations $ (13,610) $ (11,136) $ (98,737)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization 2,749 2,222 16,153
Stock-based compensation 3,959 4,274 28,074
Write-down of marketable securities -- -- 1,202
Other non-cash expenses 100 -- 231
Changes in assets and liabilities, excluding divestiture of
businesses:
Other assets 141 312 (1,403)
Current liabilities 92 (242) 698
------------ ------------ ------------
Net cash used by continuing operations (6,569) (4,570) (53,782)
Net cash provided (used) by discontinued operations 43 105 (1,403)
------------ ------------ ------------
Net cash used by operating activities (6,526) (4,465) (55,185)
Cash flows from investing activities:
Purchases of property and equipment, net (525) (1,555) (31,315)
Purchases of marketable securities (3,960) (2,933) (160,360)
Sales and maturities of marketable securities 32,185 16,000 179,072
Investment in Maptuit Corporation -- -- (3,000)
Purchase of Anacom Communications -- -- (2,500)
Proceeds from sales of discontinued operations, net of cash sold -- 581 5,885
------------ ------------ ------------
Net cash provided (used) by investing activities 27,700 12,093 (12,218)
Cash flows from financing activities:
Proceeds from private placement of common stock, net of issuance
costs -- -- 43,784
Proceeds from exercise of stock options 24 1,911 3,887
------------ ------------ ------------
Net cash provided by financing activities 24 1,911 47,671
Effect of exchange rate changes on cash and cash equivalents (4) (4) (19)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 21,194 9,535 (19,751)
Cash and cash equivalents, beginning of period 13,347 6,598 54,292
------------ ------------ ------------
Cash and cash equivalents, end of period $ 34,541 $ 16,133 $ 34,541
============ ============ ============
See accompanying notes.
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ZIXIT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements, which should be read in
conjunction with the audited consolidated financial statements included in the
Company's 2000 Annual Report to Shareholders on Form 10-K, are unaudited but
have been prepared in the ordinary course of business for the purpose of
providing information with respect to the interim periods. The Condensed
Consolidated Balance Sheet at December 31, 2000 was derived from the audited
Consolidated Balance Sheet at that date which is not presented herein.
Management of the Company believes that all adjustments necessary for a fair
presentation for such periods have been included and are of a normal recurring
nature. The results of operations for the three-month period ended March 31,
2001 are not necessarily indicative of the results to be expected for the full
year.
During 1998, the Company sold all of its operating businesses and,
accordingly, the assets and liabilities, operating results and cash flows of
these businesses have been classified as discontinued operations in the
accompanying financial statements.
Since 1999, the Company has been developing a digital signature and
encryption technology and is developing a series of products and services that
enhance privacy, security and convenience over the Internet. ZixMail(TM) is a
user friendly, secure document delivery service that enables Internet users
worldwide to easily send and receive encrypted and digitally signed
communications without changing their existing email systems or addresses. The
Company did not begin to charge for the use of these products and services until
the first quarter of 2001. Successful development of a development stage
enterprise, particularly Internet related businesses, is costly and highly
competitive. The Company's growth depends on the timely development and market
acceptance of its products. A development stage enterprise involves risks and
uncertainties, and there are no assurances that the Company will be successful
in its efforts. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The amounts presented for basic and diluted loss per common share in
the accompanying statements of operations have been computed by dividing the
applicable loss by the weighted average number of common shares outstanding. The
two presentations are equal in amounts because the assumed exercise of common
stock equivalents would be antidilutive, because a loss from continuing
operations was reported for each period presented.
2. STOCKHOLDERS' EQUITY
The Company recognizes significant non-cash stock-based compensation
expense resulting from common stock issuable in connection with the purchase of
Anacom Communications, Inc. ("Anacom") and from certain stock option grants made
to third party service providers, employees and directors. Unearned stock-based
compensation expense of $9,715,000 as of March 31, 2001 related to certain of
these equity securities is fixed in amount and will be amortized to expense
primarily in 2001. The determination of the amount to be expensed for the
remaining equity securities requires that they be revalued on each reporting
date until performance is complete with a cumulative catch up adjustment
recognized for any changes in their fair value. The Company's future results of
operations could be materially impacted by a change in valuation of these
variable equity securities as a result of future increases or decreases in the
price of the Company's common stock.
3. COMMITMENTS
In the third quarter of 2000, the Company entered into an agreement
with Yahoo! Inc. ("Yahoo!") to provide Yahoo! Mail users with the option to send
encrypted email messages through the Company's ZixMail.net messaging portal. The
Company has minimum future commitments to Yahoo! under this agreement totalling
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$5,025,000, payable in quarterly installments through August 2002. In addition,
the Company will pay Yahoo! a specified portion of revenues earned by the
Company which are associated with Yahoo! users.
4. LITIGATION
On December 30, 1999, the Company and ZixCharge.com, Inc.
("ZixCharge"), a wholly-owned subsidiary of the Company, filed a lawsuit against
Visa U.S.A., Inc. and Visa International Service Association (collectively
"Visa") in the 192nd Judicial District Court of Dallas County, Texas. To obtain
large numbers of consumers and merchants as users of its ZixCharge system, the
Company's initial marketing efforts were focused on obtaining financial
institutions as sponsors of the ZixCharge system. The suit alleges that Visa
undertook a series of actions that interfered with these prospective business
relationships and disparaged the Company, its products, its management and its
stockholders. The suit alleges that Visa intentionally set out to destroy the
Company's ability to market its ZixCharge system, which competed against the
MasterCard and Visa-owned Secure Electronic Transaction system. The suit, which
is in the discovery phase, seeks monetary damages and such other relief as the
court deems appropriate. The Company believes it is unlikely that any Visa
member banks will enter into any ZixCharge sponsorship agreements until the Visa
litigation is resolved. Moreover, the resolution of the lawsuit could have a
material effect on the Company's ability to market the ZixCharge system.
The Company is involved in legal proceedings that arise in the ordinary
course of business. In the opinion of management, the outcome of pending legal
proceedings will not have a material adverse affect on the Company's
consolidated financial statements.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Historically, the Company operated in one industry segment, the
provision of systems and solutions for the intelligent transportation,
electronic security and other markets. The Company's operations included the
design, manufacturing, installation and support of hardware and software
products utilizing the Company's wireless data and security technologies. The
businesses comprising this industry segment were sold during 1998 and 1997 and
have been classified as discontinued operations in the condensed consolidated
financial statements.
Since January 1999, the Company has been developing a digital signature
and encryption technology and is developing a series of products and services
that enhance privacy, security and convenience over the Internet. The Company
did not begin to charge for the use of these products and services until the
first quarter of 2001. ZixMail(TM) is a user friendly, secure document delivery
service that enables Internet users worldwide to easily send and receive
encrypted and digitally signed communications without changing their existing
email systems or addresses.
The foundation of the Company's business model for its ZixMail services
centers around the financial leverage expected to be generated by revenues that
are believed to be predominantly recurring in nature and an efficient cost
structure for data center operations, the core of which is expected to remain
relatively stable regardless of the number of users. New business, primarily
focused on the corporate market, is expected to be generated from the Company's
own direct sales efforts, its affiliate marketing programs and the promotional
efforts of its strategic marketing partners. Revenue streams in the near term
are projected to consist primarily of ZixMail subscription fees, which are list
priced at $24.00 per year per email address and generally expected to be
collected annually at the beginning of the subscription period. In the first
quarter of 2001, the Company began charging for its ZixMail services and, during
2001, expects to expand its sales and marketing reach and to incur certain
variable customer acquisition costs associated with generating subscription
fees. These variable costs include revenue sharing arrangements with the
Company's strategic marketing partners, anticipated to average between 20 to 25
percent of first-year subscription fees, and performance-based incentive
compensation earned by the Company's direct sales staff. The Company has set a
goal of obtaining 600,000 ZixMail subscribers by the end of 2001, starting from
a base of several thousand users generally reflecting the Company's previous
marketing approach, which was heavily weighted toward the consumer market.
Based upon its anticipated cost structure, the Company currently
estimates that it can become cash flow positive from operations in any period in
which it receives annual subscription fees from an average of 150,000 or more
new subscribers per month. The Company believes that it is possible to attain
such levels of order activity sometime in the first half of 2002. Thereafter, if
a base of 1,800,000 subscribers is attained, the Company expects to achieve the
financial leverage generated by recurring revenues and a relatively stable cost
structure, which is expected to result in a favorable cash flow scenario as new
subscribers are added. For financial accounting purposes, subscription fees will
be recognized as revenue on a prorated basis over the length of the subscription
period, usually one year. As a result of the spreading of revenues over the
applicable service period, a large portion of the new business added in 2001
will not be recognized as revenue in 2001; however, the deferred revenues
generated should provide the Company with additional cash and a predictable base
of revenue leading into 2002. When coupled with the Company's current cash
expenditure levels, and the significant levels of non-cash expenses which are
expected to exceed $20,000,000, this method of recognizing revenue makes it
likely that the Company will incur a substantial net loss in 2001. However, as
was the case in 2000, the anticipated reduction in the Company's cash resources
in 2001 will be substantially less than the expected net loss.
Additionally, in October 1999, the Company purchased all of the
outstanding shares of Anacom, a privately-held provider of real-time transaction
processing services to Internet merchants.
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RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Revenues
The Company is in the development stage and had no significant revenues
in 2000 and 2001. The Company began charging for its ZixMail products and
services in the first quarter of 2001. Subscription fees billed or received from
customers in advance are recorded as deferred revenue and recognized as revenues
ratably over the subscription period.
Research and development expenses
Research and development expenses were virtually unchanged from
$2,211,000 in the first quarter of 2000 to $2,205,000 for the corresponding
period in 2001. In 2001, employee compensation costs increased over the
comparable period in 2000 and were offset by a reduction in third party
consulting expenditures as a result of hiring additional technical personnel to
support the development of the Company's various Internet products.
Operating costs and general corporate expenses
Operating costs and general corporate expenses increased from
$9,595,000 in the first quarter of 2000 to $12,183,000 for the same period in
2001. The increase is primarily due to additional costs incurred for sales and
marketing of the ZixMail products and services, including strategic marketing
expenses with Yahoo! and the hiring of additional personnel in the areas of
direct sales and marketing support. Also, depreciation expense is higher in 2001
due to an increased investment in property and equipment. In the near-term, the
Company plans to continue the expansion of its sales and marketing effort.
Additionally, new categories of costs will begin to be incurred such as variable
customer acquisition costs associated with generating new subscription fees.
Investment income, net
Investment income increased from $574,000 in the first quarter of 2000
to $674,000 for the same period in 2001 primarily due to the increase in
invested cash and marketable securities resulting from the sale of newly issued
equity securities totalling $44,000,000 in a private placement completed in
2000.
Income taxes
The income tax benefit on the loss from continuing operations in 2001
and 2000 is different from the U.S. statutory rate of 34%, primarily due to
unbenefitted losses and tax credits. The Company has fully reserved its net
deferred tax assets due to the uncertainty of future taxable income from the
Company's business initiatives.
Loss from continuing operations
As a result of the foregoing, the Company experienced first quarter
losses from continuing operations of $11,136,000 in 2000 and $13,610,000 in
2001.
Discontinued Operations
The Company recorded a gain of $48,000 for the three months ended March
31, 2001, primarily due to a reduction in estimated future costs for various
indemnification issues associated with the disposal of its remaining operating
businesses in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the Company's principal source of liquidity is its
net working capital position of
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$41,607,000, including cash and marketable securities of $43,239,000. The
Company plans to invest its excess cash primarily in short-term, high-grade U.S.
corporate debt securities or U.S. government and agency securities. The
Company's first quarter 2001 loss from continuing operations included
significant non-cash expenses such as depreciation and amortization, and
stock-based compensation aggregating $6,808,000. Net cash used by continuing
operations in the first quarter of 2001 was $6,569,000, primarily representing
continued development and operating costs relating to the Company's Internet
related businesses. The Company began charging for its ZixMail products and
services in the first quarter of 2001. The Company's near-term liquidity will be
negatively impacted as the Company continues its development stage activities,
particularly with regards to discretionary marketing and advertising costs and
costs associated with forming or supporting its strategic marketing partners,
such as a minimum future commitment to Yahoo! totalling $5,025,000, payable in
quarterly installments through August 2002. The trend for additions to property
and equipment continues to decline with 2001 capital expenditures not expected
to exceed $2,000,000.
The Company has committed to make an additional $2,000,000 investment
in Maptuit Corporation ("Maptuit"), payable in the Company's common stock or
cash, in the near-term. Maptuit, an early stage company, is a privately-held
Internet application service provider that supplies wireline and wireless
Internet location-based services. Mr. Jeffrey P. Papows, a director of the
Company since March 2000 and the Company's chairman of its board of directors
since October 2000, serves as the president and chief executive officer of
Maptuit and holds a minority equity interest in Maptuit. Additionally, in
October 2001, the last installment for the delivery of stock issuable in
connection with the purchase of Anacom, $3,232,000 of additional consideration
in cash or stock at ZixIt's option would be required to be delivered assuming
the market value of the Company's common stock at that time is equal to $12.48,
the market value of the Company's common stock on April 30, 2001.
The Company believes its existing net working capital position will be
sufficient to meet near-term anticipated needs. The Company currently has no
existing borrowings or credit facilities. Acquisitions, if any, would be
financed by the most attractive alternative available, which could be cash or
the issuance of debt or equity securities.
RISKS AND UNCERTAINTIES
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Certain matters discussed in this Quarterly
Report on Form 10-Q contain statements that constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. The words "expect," "estimate," "anticipate," "predict,"
"believe," "plan," "should," "goal" and similar expressions and variations
thereof are intended to identify forward-looking statements. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. These risks and uncertainties include, but are not
limited to, the following:
LIMITED OPERATING HISTORY IN INTERNET ARENA
ZixIt's products and services are targeted at the new and rapidly
evolving markets for secure Internet communications and e-commerce. Although the
competitive environment in these markets has yet to fully develop, ZixIt
anticipates that it will be intensely competitive, subject to rapid change and
significantly affected by new products and service introductions and other
market activities of industry participants.
ZixIt has only a limited operating history in the Internet arena on
which to base an evaluation of its business and prospects. ZixIt's prospects
must be considered in light of the risks and uncertainties encountered by other
Internet companies in the early stages of development. These risks and
uncertainties are often more pronounced for companies in new and rapidly
evolving markets, particularly Internet-related businesses.
TIMELY DEVELOPMENT OF PRODUCTS AND SERVICES
ZixIt must be able to successfully and timely develop its products and
services. The commercial version of ZixMail was first released in March 2000.
ZixIt's new Internet secure-messaging portal - ZixMail.net(TM) - was
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first opened at the end of July 2000. ZixIt has not earned any significant
revenues from its ZixMail products or services, although ZixIt first began
charging for these products and services in the first quarter of 2001.
ZixCharge(TM) has not been commercially released.
MARKET ACCEPTANCE
ZixIt must be able to achieve broad market acceptance for its products
and services. To ZixIt's knowledge, there are currently no Internet
secure-messaging services, such as ZixMail, that currently operate at the scale
that ZixIt would require, at its current expenditure levels and proposed
pricing, to become profitable from its secure-messaging operations. To reach a
larger customer base for its secure-messaging products and services than ZixIt
can reach through its direct sales and marketing efforts, ZixIt is pursuing
collaborative relationships with third parties with large existing user bases to
assist ZixIt in promoting its secure-messaging services. There is no assurance
that ZixIt will be successful in entering into these relationships, or that if
entered into, they will significantly assist ZixIt in obtaining large numbers of
ZixMail users. Moreover, in any event, there is no assurance that enough paying
users will ultimately be obtained to enable ZixIt to operate profitably.
ZIXCHARGE UNCERTAINTIES
Since the commercial version of ZixCharge has not yet been released,
there are currently no consumers or merchants using ZixCharge. As noted in its
periodic SEC filings, ZixIt has initiated litigation against Visa, which alleges
that Visa set out to destroy ZixIt's ability to market ZixCharge. ZixIt believes
it is unlikely that any Visa member banks will enter into any ZixCharge related
collaborative relationship until the Visa litigation is resolved. Moreover, the
resolution of this litigation could have a material effect on ZixIt's ability to
market the ZixCharge system.
NO SIGNIFICANT REVENUES
ZixIt currently has no significant revenues.
COMPETITION
ZixIt is a new entrant into the rapidly evolving secure Internet
communications and e-commerce markets. ZixIt will be competing with larger
companies that have access to greater capital, research and development,
marketing, distribution and other resources than it does. In addition, the
Internet arena is characterized by extensive research efforts and rapid product
development and technological change that could render ZixIt's products and
services obsolete or noncompetitive. ZixIt's failure to develop and introduce
new products and services successfully on a timely basis and to achieve market
acceptance for those products and services could have a significant adverse
effect on its business, financial condition and results of operations. ZixIt may
decide, at any time, to delay, discontinue or not initiate the development and
release of any one or more of its planned or contemplated products and services.
Attempts have been made to define the size and nature of the market
comprising secure Internet communications. A Robert W. Baird & Co. study of this
market has coined the term "Secure e-Document Delivery Industry" to describe the
activity and business within this sector. This report is instructive with
respect to the competition within this market segment as it seeks to identify
the market segments and to analyze the various participants. The analysis
divides the secure e-document delivery industry into three segments: (1) email
content management; (2) email statement creation and delivery and (3) secure
messaging. The report identifies 26 companies that participate in one, two or
all three of these market segments. These companies include: Aladdin Knowledge
Systems, CertifiedMail.com, click2send, Content Technologies, Critical Path,
Disappearing, Inc., e-Docs, eLynx, ePage, e-Parcel, Hushmail, MessagingDirect,
MicroVault, NetEx, PostX, Private Express, Slam Dunk Networks, SRA
International, Ten Four AB, Trend Micro, Tumbleweed Communications, United
Parcel Service, ValiCert, Xenos, ZipLip and ZixIt. Not included in this listing
are PGP (Pretty Good Privacy), a division of Network Associates and
SigabaSecure.
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While several of these companies participate in two or three of the
market segments listed above, more than half -- 14 companies, including ZixIt --
focus only on the secure messaging segment. The report notes that this field is
crowded because the technological requirements to compete in this space are
widely available -- like public key infrastructure and encryption, as well as
standard Internet and email protocols. While many of these companies compete
with ZixIt, some of these companies do not. For example, although Slam Dunk
Networks delivers messages securely, it does so within an enterprise-to-
enterprise environment - the automated exchange of purchase orders between
business partners, for example. Today, ZixIt participates primarily in the
Desktop-to-Desktop market allowing individuals to transmit items like contracts,
spreadsheets and other sensitive documents that are prepared on an ad hoc basis.
Competition in this market includes, but is not limited to, CertifiedMail,
Hushmail, PGP, Private Express, SigabaSecure and ZipLip.
Although the foregoing analysis attempts to categorize and classify the
secure e-document delivery market into specific niches, it is far too early in
the evolution of this industry to accurately portray its structure. What may be
viewed today as competitive relationships between two or more participants may,
in the near future, become collaborative relationships. Thus, while assessment
of the competition is a fundamental part of this analysis, the fluid nature of
the evolving technology in this market could produce alliances between apparent
competitors that are impossible to predict today.
SECURITY INTERRUPTIONS AND SECURITY BREACHES
ZixIt's business depends on the uninterrupted operation of its secure
data center. ZixIt must protect this center from loss, damage or interruption
caused by fire, power loss, telecommunications failure or other events beyond
its control. Any damage or failure that causes interruptions in its secure data
center operations could materially harm its business, financial condition and
results of operations.
In addition, ZixIt's ability to issue digitally-signed certified
time-stamps and public encryption codes in connection with its ZixMail service
and deliver messages through its ZixMail.net message portal depends on the
efficient operation of the Internet connections between customers and ZixIt's
data center. ZixIt depends on Internet service providers efficiently operating
these connections. These providers have experienced periodic operational
problems or outages in the past. Any of these problems or outages could
adversely affect customer satisfaction.
Furthermore, it is critical that ZixIt's facilities and infrastructure
remain secure and the market perceives them to be secure. Despite ZixIt's
security measures, its infrastructure may be vulnerable to physical break-ins,
computer viruses, attacks by hackers or similar disruptive problems. It is
possible that ZixIt may have to use additional resources to address these
problems. Messages sent through ZixIt's ZixMail.net message portal will reside,
for a user-specified period of time, in its data center facilities. Also,
ZixIt's planned ZixCharge business will retain certain confidential customer
information in its data center facilities. Any physical or electronic break-ins
or other security breaches or compromises of this information could expose ZixIt
to significant liability, and customers could be reluctant to use its
Internet-related products and services.
KEY PERSONNEL
ZixIt depends on the performance of its senior management team and
other key employees, particularly highly skilled technical and sales and
marketing personnel. ZixIt's success also depends on its ability to attract,
retain and motivate these individuals. There is competition for these personnel,
and ZixIt faces a tight employment market in general. There are no agreements
with any of ZixIt's personnel that prevent them from leaving ZixIt at any time.
In addition, ZixIt does not maintain key person life insurance for any of its
personnel. The loss of the services of any of ZixIt's key employees or its
failure to attract, retain and motivate key employees could harm its business.
UNKNOWN DEFECTS OR ERRORS
Any of ZixMail, ZixMail.net message portal or ZixCharge could contain
undetected defects or errors. Despite ZixIt's testing, defects or errors may
occur, which could result in loss of or delay in revenues, failure to
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achieve market acceptance, diversion of development resources, injury to ZixIt's
reputation, litigation claims, increased insurance costs or increased service
and warranty costs. Any of these could harm ZixIt's business.
PUBLIC KEY CRYPTOGRAPHY TECHNOLOGY
ZixIt's products and services employ, and future products and services
may employ, public key cryptography technology. With public key cryptography
technology, a user has a public key and a private key, which are used to encrypt
and decrypt messages. The security afforded by this technology depends, in large
measure, on the integrity of a user's private key, which is dependent, in part,
on the application of certain mathematical principles. The integrity of a user's
private key is predicated on the assumption that it is difficult to
mathematically derive a user's private key from the user's related public key.
Should methods be developed that make it easier to derive a user's private key,
the security of encryption products using public key cryptography technology
would be reduced or eliminated and such products could become unmarketable. This
could require ZixIt to make significant changes to its products, which could
damage its reputation and otherwise hurt its business. Moreover, there have been
public reports of the successful decryption of certain encrypted messages. This,
or related, publicity could affect public perception of the security afforded by
public key cryptography technology, which could harm ZixIt's business.
GOVERNMENT REGULATION
Exports of software products using encryption technology are generally
restricted by the U.S. government. Although ZixIt has obtained U.S. government
approval to export its ZixMail product to almost all countries in the world, the
list of countries to which ZixMail cannot be exported could be revised in the
future. Furthermore, some foreign countries impose restrictions on the use of
software products using encryption technology, such as the ZixMail product.
Failure to obtain the required governmental approvals would preclude ZixIt from
selling the ZixMail product in international markets.
LACK OF GENERALLY ACCEPTED STANDARDS
There is no assurance that ZixIt's products and services will become
generally accepted standards or that they will be compatible with any standards
that become generally accepted.
INTELLECTUAL PROPERTY RIGHTS
ZixIt may have to defend its intellectual property rights or defend
against claims that ZixIt is infringing the rights of others. Intellectual
property litigation and controversies are disruptive and expensive. Infringement
claims could require ZixIt to develop non-infringing products or enter into
royalty or licensing arrangements. Royalty or licensing arrangements, if
required, may not be obtainable on terms acceptable to ZixIt. ZixIt's business
could be significantly harmed if it is not able to develop or license the
necessary technology. Furthermore, it is possible that others may independently
develop substantially equivalent intellectual property, thus enabling them to
effectively compete against ZixIt.
SALE OF BUSINESSES
ZixIt disposed of its remaining operating businesses in 1998 and 1997.
In selling those businesses, ZixIt agreed to provide customary indemnification
to the purchasers of those businesses for breaches of representations and
warranties, covenants and other specified matters. Although ZixIt believes that
it has adequately provided for future costs associated with these
indemnification obligations, indemnifiable claims could exceed ZixIt's
estimates.
STOCK PRICE
The market price of ZixIt's common stock has fluctuated significantly
in the past and is likely to fluctuate in the future. Also, the market prices of
securities of other Internet-related companies have been highly volatile and, as
is well known, have declined substantially and broadly over the past several
months.
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OTHER UNANTICIPATED RISKS AND UNCERTAINTIES
There are no assurances that ZixIt will be successful or that it will
not encounter other, and even unanticipated, risks. ZixIt discusses other
operating, financial or legal risks or uncertainties in its periodic SEC
filings. ZixIt is, of course, also subject to general economic risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended March 31, 2001, the Company did not experience any
material changes in market risk exposures with respect to its cash investments
and marketable securities that affect the quantitative and qualitative
disclosures presented in the Company's 2000 Annual Report to Shareholders on
Form 10-K.
The Company has made an equity investment in Maptuit Corporation, an
early stage privately-held company. There is no readily determinable market
value for the Company's investment in Maptuit Corporation. Investments of this
nature are subject to significant fluctuations in fair market value due to the
volatility of the equity markets. The Company identifies and records impairment
losses when events and circumstances indicate the investment has been impaired.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following is a list of exhibits filed as part of
this Quarterly Report on Form 10-Q.
DESCRIPTION OF EXHIBITS
3.1 Articles of Incorporation, together with
all amendments thereto (filed as Exhibit
3.1 to the Company's Form 10-K for the
year ended December 31, 1998, and
incorporated herein by reference).
Articles of Amendment to Articles of
Incorporation, dated September 14, 1999
(filed as Exhibit 3.2 to the Company's
Form 10-Q for the quarterly period ended
September 30, 1999, and incorporated
herein by reference). Articles of
Amendment to Articles of Incorporation,
dated October 12, 1999 (filed as Exhibit
3.3 to the Company's Form 10-Q for the
quarterly period ended September 30, 1999,
and incorporated herein by reference).
3.2 Restated Bylaws of ZixIt Corporation,
dated September 14, 1999 (filed as Exhibit
3.2 to the Company's Form 10-Q for the
quarterly period ended March 31, 2000, and
incorporated herein by reference).
*10.1 ZixIt Corporation 2001 Employee Stock
Option Plan, dated May 4, 2001.
b. Reports on Form 8-K
No reports of the Registrant on Form 8-K have been
filed with the Securities and Exchange Commission
during the three months ended March 31, 2001.
*Filed herewith.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
ZIXIT CORPORATION
(Registrant)
Date: May 14, 2001 By: /s/ Steve M. York
--------------------------------
Steve M. York
Senior Vice President, Chief
Financial Officer, and Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Articles of Incorporation, together with all
amendments thereto (filed as Exhibit 3.1 to the
Company's Form 10-K for the year ended December
31, 1998, and incorporated herein by reference).
Articles of Amendment to Articles of
Incorporation, dated September 14, 1999 (filed as
Exhibit 3.2 to the Company's Form 10-Q for the
quarterly period ended September 30, 1999, and
incorporated herein by reference). Articles of
Amendment to Articles of Incorporation, dated
October 12, 1999 (filed as Exhibit 3.3 to the
Company's Form 10-Q for the quarterly period ended
September 30, 1999, and incorporated herein by
reference).
3.2 Restated Bylaws of ZixIt Corporation, dated
September 14, 1999 (filed as Exhibit 3.2 to the
Company's Form 10-Q for the quarterly period ended
March 31, 2000, and incorporated herein by
reference).
*10.1 ZixIt Corporation 2001 Employee Stock Option Plan,
dated May 4, 2001.
* Filed herewith